A View of the Economy from Abroad
by Ben Stein
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Posted on Thursday, July 5, 2007, 12:00AM
I'm writing this from Frankfurt, Germany. The perspective from my perch here in the financial district at the lush Villa Kennedy Hotel allows me to offer a few bullet-point thoughts on the economy.

Subordinate Subprime

First, I'm not at all worried about the stock market despite the recurrent panic about subprime mortgage problems and resistance to some loans by lenders in private equity deals (which used to be called, appropriately, leveraged buyouts, or LBOs).

Subprime is a small sector of the mortgage market, as I've said before. It might be 15 percent at most. The defaults and delinquencies in this sector might be roughly 15 percent, which makes for a total problem rate of about 2.25 percent of the whole mortgage market.

If all this goes into foreclosure (which is unlikely), it will realize about 60 percent upon liquidation at the very least. That means the real loss might be about .9 percent, or less than 1 percent. That's a large number, but tiny in the context of the economy.

How the Economy Rates

As to the resistance of lenders to lend at low rates on some LBOs, this shows that the loan market is not completely insane. That's a good sign, not a bad one. It would be much more worrisome for the future if lenders wanted to sign up for every deal.

Besides, again, the effect is tiny in the context of the whole economy. It's a misuse of time and energy for individual investors to worry about private equity players having to pay a small amount more for loans.

The rise in interest rates is a real worry, if it continues in a big way. If interest rates go up by another two percentage points, the net present value of stock market earnings and dividends would be cruelly cut, and would dent the market seriously.

But there's no sign of that happening. Domestic interest rates are rising to equilibrate U.S. rates with European rates, and they reflect a strong economy. So these aren't worrisome signs at this point.

Don't Hit the Panic Button

The fact is that the economy is booming on a record scale, and profits are superb. There's no reason to panic.

The market is moved by traders who sell on a dime to make a short-term profit. That's their job. When they do sell and drive prices down, they're not hurting the underlying companies or the future prospects for the economy. In effect, they're putting stocks on sale. That represents an opportunity, not a reason to run.

I still like the 10- and 20-year prospects for the U.S. economy. There are many threats -- nuclear terrorism, harm to oil supplies, and so on -- but for the next 20 years, we'll probably be able to keep these under control.

I have no clue whether the market will be higher or lower in a week or a month or a year. But in 10 years, you'll regret it if you didn't buy in July 2007.
International Involvement
I've also observed that Europe is booming. The prosperity here in Germany is amazing -- this is a country that's happy and peaceful despite its terrifying past. And the same goes for most of Europe.

Television advertising here is amazing, too. Commercials encourage you to invest in Angola (yes, Angola); call for the 2014 Winter Olympics to be in South Korea -- with cooperation from North Korea (yes, North Korea); and encourage investment in Russia (yes, Russia). This indicates a world economy that's on fire.

For you, that means it's time to step up investment in the iShares MSCI EAFE (EFA), the index fund for large companies in Europe, Australasia, and the Far East. Their currencies -- except for the Japanese yen -- are strong, and their profits are good, if not great.

It's also wise to keep buying iShares' MSCI Emerging Markets index fund (EEM) and the BLDRS Emerging Markets 50 ADR index fund (ADRE). The developing nations are racing ahead based on minerals or -- an even better source of prosperity -- a hardworking labor force. These are, as I keep saying, plays on the falling dollar and on the future of these countries. Over long periods, it's also money in the bank.

A Dressing Down on Dressing Down

Finally, to change the subject, I'm impressed at how badly most Americans dress for work. Even at major banks and law firms I see Americans dressed like small children. How can a client have confidence in people who show up dressed as if they're going to a rock concert? If you were a client, who would you like -- the guy in jeans and sandals or the guy in a nicely tailored suit and well-chosen necktie?

I was at the US Airways Club at LaGuardia airport a few days ago, and almost all the men there were in suits and ties. Almost all the women were in suits or dresses. They projected a sense of confidence and capability. You can have the same thing after just one visit to Brooks Brothers or J.Press. Don't let the opportunity pass you by -- human beings make decisions with their eyes. Be on the right side of it.

So, in a word, things are good -- and they can be even better if you dress better. Go for it.

Ben Stein has no financial interest in the index funds mentioned in this column.

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Ben Stein is a lawyer, economist, and commentator on finance (and a well-known actor and Hollywood personality).

He served as an economist at the U.S. Department of Commerce. He has been a longtime contributor to Barron's and a columnist and editorial writer for The Wall Street Journal. He has also written extensively about finance for New York magazine and The Washington Post.

In addition to writing for Yahoo! Finance, he currently writes a biweekly column on economics and finance for The New York Times and appears weekly on the Fox News network commenting on finance and economics.

He is the author of several personal finance books, including "How to Ruin Your Financial Life," "Moneypower: How to Make Inflation Make You Rich," "Financial Passages," and -- with Phil DeMuth -- the best sellers "Yes, You Can Time the Market," "Yes, You Can Be a Successful Income Investor," and the forthcoming "Yes, You Can Still Retire Comfortably." He grew up in Silver Spring, Md. His father was Herbert Stein, the well known economist. He graduated from Columbia University in New York City in 1966 with honors in economics. He studied law and economics at Yale from 1967 to 1970 and graduated from Yale Law School as valedictorian in 1970.